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Debits and credits made easy I guarantee that you will understand the accounting term debits and credits once and for all after watching this video There is very broad agreement globally on some terminology For example any captain will tell you that when facing forward on a ship the left side is called port and the right side is called starboard In the same way any accountant will tell you that when making accounting journal entries the debits go on the left and the credits go on the right How do debits and credits work Does a debit increase an account and does credit decrease an account Or is it the other way around That really depends on the type of account we are looking at For balance sheet accounts we essentially have three types of account Assets accounts where the natural state is for an asset account to have a debit balance Liability accounts where the natural States for a liability account to have a credit balance Equity accounts where the natural state is for an equity account to have a credit balance Assets increase with a debit liability and equity increase with a credit For income statement accounts we have two types of account Expense accounts where the natural States for an expense account to have a debit balance Revenue accounts where the natural States for a revenue account to have a credit balance Expenses increase with a debit Revenues increase with a credit Lets go through some journal entry examples for business transactions to illustrate that If a company raises cash from shareholders when it starts out then assets and equity are affected More specifically the cash account within assets increases the debit side of the journal entry and so does the shareholder capital in equity the credit side of the journal entry If a company raises cash through a loan from bank assets and liabilities are affected More specifically the cash account within assets increases the debit side of the journal entry and so do the liabilities the credit side of the journal entry as you owe this money to the bank If a supplier invoices you for cleaning services expenses in the income statement and liabilities on the balance sheet are affected Expenses increase the debit of the journal entry and so do liabilities the credit of the journal entry more specifically the accounts payable account within liabilities If you subsequently pay the supplier settle your debt to the supplier then the liabilities decrease the debit of the journal entry and the assets decrease the credit of the journal entry as cash is transferred from your company to the supplier If you invoice your customer for services rendered the assets on the balance sheet increase the debit of the journal entrain an asset account called accounts receivable and the revenue in the income statement increases the credit of the journal entry Balance sheet accounts assets debit balance liabilities and equity credit balance Income statement accounts expenses debit balance revenue credit balance At...
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